UNIVERSITY INSTITUTE OF LEGAL

STUDIES (UILS)

Bachelor of Laws (LL.B.)

Subject Name: Commercial Arbitration

COMMERCIAL ARBITRATION:
Arbitration Agreement DISCOVER . LEARN . EMPOWER
 ARBITRATION
AGREEMENT
Course Outcome
CO Number Title Level

CO1 Students will be able to learn the basic rules that guide Understand
the arbitration process from start to finish.

CO2 To enable the students to recognize the difference Understand

between arbitration and other law.

CO3 To enable the students to understand the impact of Understand

arbitration on society

Source: https://blog.ipleaders.in/an-overview-of-arbitration-in-india/ 2
 ARBITRATION AGREEMENT

Meaning
• Arbitration agreement is a written agreement between the parties to a dispute to designate
a particular arbitrator to resolve their disputes arising out of a particular business
relationship.
• It calls for a mandatory arbitration before an arbitrator.
• An Arbitration agreement is usually legally binding.
• Companies often require employees to sign an arbitration agreement which prevents the
employee from suing the company in court.
• Arbitration agreements are unsafe to employees because they often require an employee
to pay thousands of dollars to file a claim with an arbitration association where s/he could
have paid a few hundred dollars, or in some cases nothing at all to file in court.
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• Arbitration agreement is a contract according to which some persons commit

to relegate their actual or possible dispute and argument to the investigation
and comments of a person or persons other than official judicial authorities.
• In arbitration agreement, the arbiter or arbiters might have been appointed
and it might have been only stated that they refer their dispute to the
arbitration of one or several persons.
• The law has not predicted a special form for arbitration agreement; thus, it
might be as an official document or might be regulated as a normal document
and also it does not greatly differ if it is fulfilled in the statement of the court
or outside the court and in the main deal.
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Definition and Forms of Arbitration Agreement

• In general, the arbitration agreement provides the basis for arbitration.
• It is defined as an agreement to submit present or future disputes to arbitration.
• This generic concept comprises two basic types:
a) A clause in a contract, by which the parties to a contract undertake to submit
to arbitration the disputes that may arise in relation to that contract (arbitration
clause); or
b) An agreement by which the parties to a dispute that has already arisen submit
the dispute to arbitration (submission agreement).

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• The arbitration clause, therefore, refers to disputes not existing when the agreement is
executed.
• Such disputes, it must be noted, might never arise.
• That is why the parties may define the subject matter of the arbitration by reference to the
relationship out of which it derives.
• The submission agreement refers to conflicts that have already arisen.
• Hence, it can include an accurate description of the subject matters to be arbitrated.
• Some national laws require the execution of a submission agreement regardless of the
existence of a previous arbitration clause.
• In such cases, one of the purposes of the submission agreement is to complement the generic
reference to disputes by a detailed description of the issues to be resolved.
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• Article 7 of the UNCITRAL Model Law on Arbitration, 1985 defines “Arbitration

agreement” as an agreement by the parties to submit to arbitration all or
certain disputes which have arisen or which may arise between them in
respect of a defined legal relationship, whether contractual or not.
• An arbitration agreement may be in the form of an arbitration clause in a
contract or in the form of a separate agreement.
• The arbitration agreement shall be in writing.
• An arbitration agreement is in writing if its content is recorded in any form,
whether or not the arbitration agreement or contract has been concluded
orally, by conduct, or by other means.
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• The requirement that an arbitration agreement be in writing is met by an electronic

communication if the information contained therein is accessible so as to be useable for
subsequent reference; “electronic communication” means any communication that the
parties make by means of data messages; “data message” means information generated, sent,
received or stored by electronic, magnetic, optical or similar means, including, but not limited
to, electronic data interchange (EDI), electronic mail, telegram, telex or telecopy.
• An arbitration agreement is in writing if it is contained in an exchange of statements of claim
and defence in which the existence of an agreement is alleged by one party and not denied by
the other.
• The reference in a contract to any document containing an arbitration clause constitutes an
arbitration agreement in writing, provided that the reference is such as to make that clause
part of the contract.
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• Section 7, Arbitration and Conciliation Act, 1996, defines “arbitration

agreement” as an agreement by the parties to submit to arbitration
all or certain disputes which have arisen or which may arise between
them in respect of a defined legal relationship, whether contractual or
not.
• In other words, Section 7 of the 1996 Act replicates Article 7 of the
UNCITRAL Model Law on Arbitration 1985.

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Features of Arbitration Agreement

• In K.K. Modi V. K.N. Modi, AIR 1998 SC 1291, the court observed that among the
attributes which must be present for an agreement to be considered as an arbitration
agreement are:
1. The arbitration agreement must contemplate that the decision of the tribunal will be
binding on the parties to the agreement.
2. That the jurisdiction of the tribunals to decide the rights must derive either from the
consent of the parties or from an order of the Court or from a statute, the terms of
which make it clear that the process is to be an arbitration.
3. The agreement must contemplate that substantive rights of parties will be determined
by the agreed tribunal.
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3. The agreement must contemplate that substantive rights of parties will be

determined by the agreed tribunal.
4. That the tribunal will determine the rights of the parties in an impartial and
judicial manner with the tribunal owing an equal obligation of fairness
towards both sides.
5. That the agreement of the parties to refer their disputes to the decision of the
tribunal must be intended to be enforceable in law and lastly,
6. The agreement must contemplate that the tribunal will make a decision upon
a dispute which is already formulated at the time when a reference is made
to the tribunal.
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Defined Legal Relationship

• Dispute must be in respect of a defined legal relationship whether contractual or not as required under
Section 7 (1) of the Arbitration and Conciliation Act 1996.
• The expression “Defined Legal Relationship” has been borrowed from the Model Law.
• Contractual relationships are those which arise out of contracts.
• Apart from a contractual legal relationship, an arbitration agreement may as well be in respect of disputes
arising out of non contractual relationship.
• There are number of relationships which are legal such as a landlord and tenant, employer and employee,
businessman and customer, employer/owner and contractor, partner and partner.
• These relationships are also contractual irrespective of the fact whether there exists a formal contract or
not.
• The phrase “whether contractual or not” also covers disputes arising out of quasi contractual
relationships, of the type contemplated by Section 70 of the Indian Contract Act.
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• There are a large number of disputes which arises out of statutory

relationships and the statutes provide for settlement of disputes by
arbitration of the disputes arising under them.
• Non contractual legal relationship would generally arise from
breach of statutory obligations.

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Requirements of a Valid Arbitration Agreement

1. an arbitration agreement must be in writing or must be contained in a written
document signed by the parties
2. arbitration agreement may either be an express clause in a contract whereby
parties agree to refer future disputes to arbitration, or in a separate document
whereby parties agree to submit their existing dispute to arbitration.
3. arbitration agreement may also be inferred from written correspondence or
pleadings exchanged between parties.
4. arbitration agreement must be in respect of a dispute
capable of settlement by arbitration under the applicable laws.
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5. The parties to the arbitration agreement must have legal capacity

under the law applicable to them.
6.The arbitration agreement must be valid under the law to
which the parties have subjected it or under the applicable laws.
In other words, the agreement must be operative,
capable of being performed and enforceable against the parties

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• It must be legally valid under the Indian Contract Act, 1872. A

contract, to be legally valid under said act, must have the following:
a. Parties must be legally competent to enter into contract
b. Consent of parties must not be influenced by fraud
c. The object of the contract must be lawful.
d. The contract must be capable of being carried into effect.
Therefore, it should not be uncertain.

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Arbitration Clause in a Contract

• An Arbitration agreement may be entirely separate or it may be incorporated in a
contract as an ‘arbitration clause’.
• The status of arbitration clause in a contract should be judged in the light of the
provisions of Section 16 (1) (a) and (b) of The Arbitration and Conciliation Act 1996
which enshrines that “…An arbitration clause which forms part of a contract shall
be treated as an agreement independent of the other terms of the contract”.
• In M. Dayanand Reddy v. A.P. Indus. Corporation, Supreme Court observed
“Arbitration Clause does not classify the rights of the parties under the contract. It
relates wholly to the mode of determining the rights”.

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• Arbitration clause in a contract has a unique distinction from that of the other clauses.
• While the other clauses sets out the obligations which the respective parties have to carry out,
arbitration clause is a neutral clause wherein both the parties consent for the same and
unanimously agree to refer the dispute to the arbitrator and settled the same through the
tribunal of their own choice.
• In Damodar Shah (Arbitrator) V. U.O.I, the court observed “A contract with arbitration clause
rolls, as it were, two contracts in one. An arbitration clause in a contract amounts to two
contracts in one, one relating to the execution of the work……and the other one to resolve the
dispute in event any dispute arises in respect of the said contract’…“..No doubt if the main
contract does not exist, the arbitration clause (agreement) also does not exist. But the
arbitration clause may survive the main contract in respect of disputes arising from the contract
which may otherwise have come to an end by performance, repudiation, rescission or
substitution”.
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Significance of Arbitration Agreement

• Even though the Arbitration clause is the indispensable part of the particular contract, but
the three main clauses “Separability”, “Severability” or “Autonomy” of the arbitration clause
are distinctive and independent clause of the underlying contract.
• The arbitration agreement is accepted as a distinct agreement, separate from the underlying
agreement – a concept defined as the separability principle. This principle prevents the
validity of one agreement from being affected by the other one; it effectively establishes the
full autonomy of an arbitration agreement and the integrity of the arbitral process.
• Nonetheless, the two may be assessed together. However, it is important to consider, because
of the separability of the arbitration agreement, whether the choice of law stipulated by the
parties in the main contract is applicable to the arbitration agreement. Thus, dispute
resolution and choice of law clauses should be drafted with the utmost caution and care.

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 ARBITRATION AGREEMENT

• The arbitration agreement is a distinctive agreement which provides the basis for arbitration
as defined under the principle of seperability.
• It is defined as an agreement to submit present or future disputes between the parties to a
dispute to appoint a particular arbitrator to resolve their disputes arising out of a particular
business relationship.
• Having such principle, it does not negate the validity of the other contractual obligations and
the agreement.
• With incorporation of the separate arbitration agreement, the solution achieved is acceptable
to the immediate parties to the dispute and the essence lies in providing the fair remedy to
the parties.
• The main focus is given to the choice of law as determined by the parties to the contract which
is binding for the arbitration agreement with utmost care and caution.
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Functions of Arbitration Agreement

• Arbitration agreement defines the “road map” to the successful
settlement of dispute between parties.
• It is certain that the parties will always agree to arbitrate on what
will comply with public policy and in the benefit of the society.
• In fact, it is the compass of arbitral process.

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 ARBITRATION AGREEMENT

• The functions of Arbitration Agreement are:

1) To provide for arbitration in case of existing and future disputes which are arbitrable and enforceable;
2) Once arbitration agreement is in writing it follows that majority action by arbitration panel is
authorized.
3) Default proceedings (in the absence of a party) are authorized under certain circumstances.
4) Provision is made for continuance and adjournment of hearings.
5) Limitation is placed upon the effect of waivers of the right to be represented by counsel.
6) Awards are required to be in writing and signed by the arbitrators, and limitation is stated regarding
the time within which awards must be rendered.
7) Arbitrators are granted limited authority to modify or correct awards upon timely application by a
party. However, arbitration must be made within a reasonable time otherwise the essence of
arbitration will be defeated.
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Autonomy / Separability of Arbitration Agreement

• Historically, it was held that an arbitration agreement contained in a contract was accessory to the
main contract and that the invalidity of the contract also entailed the invalidity of the arbitration
agreement.
• On the basis of that interpretation, arbitral jurisdiction was frequently restricted by challenges to the
validity of the contract, since those challenges involved the arbitrators’ jurisdiction as well.
• The argumentative line was as follows:
1. If the main contract is null and void, so is the arbitration agreement that is accessory to it;
2. If the arbitration agreement is considered null and void, arbitrators lack jurisdiction to solve any of
the question relating to such contract, including whether the contract is invalid or not;
3. As the validity of the arbitration agreement is being questioned, arbitrators must not intervene until
a court decides the matter.

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• In this way, the mere filing of such a defence would entail an

obstacle to arbitration.
• In order to avoid that situation, most laws and regulations on
arbitration have included two very important principles:
1. “Separability”, “autonomy” or “independence” of the arbitration
clause; and
2. “Kompetenz-Kompetenz” or “compétence de la compétence”.

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• The “Kompetenz-Kompetenz” principle aims at giving arbitrators the possibility to

examine and decide in first instance on any objection to their jurisdiction.
• According to the principle of “separability of the arbitration clause”, if the
arbitrators decide, within the scope of their jurisdiction, that the contract
containing the arbitration clause is null and void, that does not entail the loss of
their jurisdiction.
• In practice, however, the two principles complement one another, since the
contentions are usually made at the same time.
• The invalidity of the contract, the invalidity of the arbitration agreement and the
consequent lack of jurisdiction of arbitrators are often part of a common defense
strategy.`
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• The purpose of these principles is to enable arbitrators to retain jurisdiction and solve
the disputes, even those related to the valididy or invalidity of the contract.
• Otherwise, the mere contention of invalidity of the contract would imply neutralizing
the effects of the arbitration agreement.
• This would, in turn, mean invalidating the method chosen by the parties to settle the
conflict.
• The ultimate argument of these provisions is that the arbitration clause is not just
another clause within a contract.
• Its special purpose –to confer jurisdiction upon those who must solve the differences
arising under the contract– entails empowering arbitrators to rule on all questions
related to the contract, even those relating to their own jurisdiction.
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• There are also other reasons behind these rules.

• The possibility of removing the arbitrators by just raising a plea that
the contract is invalid would constitute a simple way of avoiding
arbitration.
• If the matter of the arbitrator’s jurisdiction was dependant on a
previous court decision on the validity of the contract, arbitrators’
intervention could easily be avoided.
• This would entail disregarding the original common intention of the
parties to submit conflicts arising out of the contract to arbitration.
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• Article 16 of the Model Law upholds these two principles when it says:
“(1)The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to
the existence or validity of the arbitration agreement. For that purpose, an arbitration clause
which forms part of a contract shall be treated as an agreement independent of the other
terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall
not entail ipso jure the invalidity of the arbitration clause.
(2)A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the
submission of the statement of defence. A party is notprecluded from raising such a plea by the
fact that he has appointed, or participated in the appointment of, an arbitrator. A plea that the
arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter
alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The
arbitral tribunal may, in either case, admit a later plea if it considers the delay justified.

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(3)The arbitral tribunal may rule on a plea referred to in paragraph (2)

of this article either as a preliminary question or in an award on the
merits. If the arbitral tribunal rules as a preliminary question that it
has jurisdiction, any party may request, within thirty days after
having received notice of that ruling, the court specified in article 6
to decide the matter, which decision shall be subject to no appeal;
while such a request is pending, the arbitral tribunal may continue
the arbitral proceedings and make an award.”

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• This rule does not confer upon arbitrators full powers to rule on the
contention of lack of jurisdiction.
• They are allowed to decide this matter initially, as a way of preventing the
mere raising of the plea from causing their removal.
• By examining the background to the case, the arbitral tribunal may decide
to what an extent the defenses raised by the parties are legally effective.
• In the meantime, however, the arbitration clause must be considered
valid in order to allow arbitrators to rule on its existence, validity or
duration.
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• However, as is laid down in paragraph 3, this arbitrators’ decision is subject to judicial

review.
• In this connection –the commentators of the Model Law explain– the issue is not the
finality of the arbitrator’s decision on their jurisdiction and the consequent ouster of the
jurisdiction of the courts, but rather when and the conditions under which the courts may
play their role as the final authority on the question of arbitral jurisdiction.
• The basic problem is how to reconcile the realization of the objectives of commercial
arbiration, which would be defeated if an arbitral tribunal would have to suspend or cease
its proceedings every time a party pleaded invalidity of the arbitration agreement, with an
effective measure of court supervision to ensure that the arbitral tribunal does not finally
confer on itself a jurisdiction that by reason of the contractual nature of arbitration can
only derive from the parties’ agreement
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• The “separability doctrine” was articulated comprehensively by the United States Supreme Court in Prima
paint Corp v. Flood & Conklin Manufacturing Co., where the Court ruled that arbitration clauses can be
‘separable’ from the contracts in which they are included.
• The plaintiff in Prima paint Corp brought an action to rescind a contract on the grounds that the contract has
been fraudulently induced.
• The defendant moved to stay the court action, invoking the contract’s arbitration clause and contending that
an arbitrator, and not a court, should decide whether the contract was valid.
• Agreeing with the defendant, the Supreme Court concluded that because the plaintiff was challenging the
underlying contract generally rather than the arbitration clauses specifically, arbitration of plaintiff’s
fraudulent inducement claims were required.
• The court was careful to distinguish this from a claim that the arbitration clause itself had been fraudulently
induced.
• The doctrine would not apply in situations where parties claim that they never agreed to arbitrate, or they
were fraudulently induced into signing an arbitration agreement.
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Autonomy of Arbitration Agreement in Indian Context

• Section 16 of the Arbitration and Conciliation Act, 1996 is modelled on the Article 16 of the
UNCITRAL Model Law on Arbitration 1985.
• Accordingly, (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any
objections with respect to the existence or validity of the arbitration agreement, and for that
purpose,—
(a) an arbitration clause which forms part of a contract shall be treated as an agreement
independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the
invalidity of the arbitration clause.
(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the
submission of the statement of defence; however, a party shall not be precluded from raising such
a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.

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• (3) A plea that the arbitral tribunal is exceeding the scope of its authority shall
be raised as soon as the matter alleged to be beyond the scope of its authority is
raised during the arbitral proceedings.
(4) The arbitral tribunal may, in either of the cases referred to in sub-
section (2) or sub-section (3), admit a later plea if it considers the delay justified.
(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or
sub-section (3) and, where the arbitral tribunal takes a decision rejecting the
plea, continue with the arbitral proceedings and make an arbitral award.
(6) A party aggrieved by such an arbitral award may make an application for
setting aside such an arbitral award in accordance with section 34.

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• In Prasun Roy v. Calcutta Metropolitan Authjority AIR 1988 SC 205,

the court observed that a party who has taken part in the entire
proceedings but raised the objection as to want of jurisdiction in the
entire proceedings but raised the objection as to want of jurisdiction
only when the arbitral award goes against him, such a party is
estopped from challenging the jurisdiction of the arbitral award.
Therefore, it cannot be allowed to be challenged on such ground of
“known disability”.

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Assessment Pattern

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 APPLICATIONS

• The students will be able to understand the national history of arbitration.

• The students will be able to understand the international history of arbitration.

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 REFERENCES
Reference Books and Articles
• Introduction to International Commercial Arbitration,
http://legal.thomsonreuters.com.au/product/AU/files/720502469/international_comm_arb_ch_1.pdf
• Module 5.1. International Commercial Arbitration: Overview – UNCTAD,
http://unctad.org/en/Docs/edmmisc232add38_en.pdf
Reference Websites
• https://www.academia.edu
• https://core.ac.uk/

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THANK YOU